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Protests help Russia ‘look attractive’

Vladimir Putin’s fast-tracked economic reform agenda will make Russia a more attractive place to invest in the years ahead, according to HSBC’s Ed Conroy. Mr Conroy, co-manager of the $625m (£398m) HSBC GIF Russia Equity fund, said the protests which took place following Mr Putin’s victory in March’s presidential election could accelerate economic reforms.

“The fact that people have been voicing disappointment with the electoral process seems to have put more pressure on the government to put in place a reform agenda,” Mr Conroy said.

“The slow path to reform has been accelerated. Russia still has a strong government and there are a number of things that can be done. Hopefully the reform model will lead them to realise that it makes sense to follow a free market agenda.”

The World Bank has ranked Russia 120th out of 183 countries based on doing business there, which the Russian government has promised to improve.

In his victory speech, Mr Putin spoke of diversifying Russia’s economy away from commodities and increasing personal income and market wealth. Mr Conroy said that, if successful, the reforms could boost the country’s top commodity players.

However, it later emerged key officials in the new government, including among commodity giants such as Rosneft, also occupied senior positions under Mr Putin’s previous regimes.

The manager said: “Russia is a high beta [or highly sensitive] market because half of the index is based around commodities, [which are more economically sensitive,] so prices can be volatile. We’re never going to get away from that, but it still makes sense to diversify as it would be good for job creation in other sectors and it would add value to commodities companies.”

Mr Conroy said the reforms, coupled with a narrowing of the discount between Russia and other emerging markets, could lead to a rerating of the Russian stockmarket.

During the rally at the beginning of 2012 – driven by oil prices and the long-term refinancing operation in Europe – Mr Conroy said the discount at which Russian shares traded had narrowed to 35 per cent, near its five-year average of 25 per cent, before increasing to more than 40 per cent following the subsequent sell-off.

At a stock level, Mr Conroy said financials looked particularly attractive after a sell-off driven by sentiment from Europe. The manager said banks, including the fund’s third-largest holding Sberbank, were “far too cheap” based on their margins and asset quality, and did not have to go through a “painful” process of deleveraging balance sheets.